Valuation Of Taxable Service

The definition of value of taxable service is no longer confined to the gross amount charged in all situations. Thus far, if a service provider chose not to charge any money for the service provided, he was not required to pay tax on the free service. This is no longer the case now. The new definition of value, effective April 18, 2006, is far more sophisticated in its style and clientele. The value of taxable service now depends upon the form and manner in which the consideration for providing the taxable service is received by the service provider. If the consideration is entirely in terms of money, the value shall be the gross amount of the money charged. However, if the consideration is not wholly in terms of money or only partly in terms of money, then the value has to be determined applying the rigors of the recently notified Service Tax (Determination of Value) Rules, 2006. The new section 67 provides valuation of taxable services for charging service tax. The salient features of the new section 67 are, ? Where the consideration received for provision of services is wholly in money, the value shall be the gross amount charged by the service provider for provision of service. ? Where the consideration received for provision of service is not wholly consisting of money, the value in such cases shall be the gross amount charged by the service provider for provision of similar service to any other person in the ordinary course of trade. ? ? ? If the value of similar service provided by the same service provider is not available, then the value has to be determined. Money value of non-money consideration received should be determined by the service provider. If the consideration received is not wholly consisting of money, equivalent money value of the consideration determined by the service provider shall be the taxable value for charging service tax. ? If the consideration received is partly in money and partly in non-money terms, the sum of consideration received in money and the equivalent money value of the nonmoney consideration determined by the service provider shall be the taxable value for charging service tax.

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The taxable value shall be determined by the service provider but the value so determined for the purpose of paying service tax should not be less than the cost of provision of such service.

The valuation rules put an obligation upon the service provider to determine and declare the value where the consideration is not entirely in terms of money. However, this can be subjected to scrutiny by the central excise officer. While such power is justified to safeguard the revenue, many are scary of the likely disputes and litigation.

The new section 67 and the rules issued for this purpose enable charging of service tax in cases where the consideration received is not in money terms. Where the service tax is charged on the basis of similar services provided by the same person, the same should be based on a normal transaction between two independent persons at an arms length price.

The value determined by the service provider under rule 3 for the purpose of payment of service tax should not be less than the cost of provision of such services.

However, where there are adequate reasons warranting verification of the value adopted by the service provider for payment of service tax, rule 4(2) specifically enables verification of records in such cases.

It is expected that the department should use this provision with extreme care and caution. Such verification should be undertaken only after the written instructions from the Divisional AC/DC. After verification of the records, if the department is of the view that the value so determined and adopted for payment of service tax warrants revision, the issue should be decided after issue of show cause notice and observing the prescribed procedures. Before issuing any show cause notice on matters relating to valuation, concurrence of Commissioner should be obtained.

Reimbursable expenditure Value for the purpose of charging service tax is the gross amount received as consideration for provision of service. All expenditures or costs incurred by the service provider in the course of providing a taxable service forms integral part of the taxable value and are includable in the value. It is not relevant that various expenditure or costs are separately indicated in the invoice or bill issued by the service provider to his client. The service provider in the course of providing any taxable service may incur certain expenditure or cost as a pure agent of the client. The service provider seeks to exclude such expenditure or

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cost incurred by him as a pure agent of his client (generally known as reimbursable expenditure) from the value of the taxable services. There could be situations where the client of the service provider specifically engages the service provider, as his agent, to contract with the third party for supply of any goods or services on his behalf. In those cases such goods or services so procured are treated as supplied to the client rather than to the contracting agent. The service provider in such cases incurs the expenditure purely on behalf of his client in his capacity as agent of the client. Amounts paid to the third party by the service provider as a pure agent of his client can be treated as reimbursable expenditure and not includible in the taxable value. However, if the service provider acts as an undisclosed agent i.e. acting in his own name without disclosing that he is actually acting as an agent of his client, he cannot claim the expenditure incurred by him as reimbursable expenditure. Whether the expenditure or cost incurred by the service provider in his capacity as a pure agent of the client or incurred on his own account is a question of fact and law and is to be determined carefully. Indication of different elements of the transaction in the invoice or bill could often be misleading. One has to carefully examine the exact legal nature of the transactions and other material facts before taking a view as to whether or not the expenditure sought to be excluded from the value is reimbursable expenditure. Not only the form , but also the substance of the transaction should be duly taken into account. Rule 5 pertains to reimbursable expenditure incurred by the service provider as a pure agent of his client. Explanation (1) to rule 5(2) clearly specifies the criteria to decide whether the service provider acts as a pure agent or not in a given situation. In the case of agency function, the agent neither intends to hold nor holds any title to the goods or services and also never uses such goods or services so procured. It is also important to note that the service provider only receives the actual amount incurred to procure such goods or services.

Conclusion: The Finance Bill, 2006, passed by Parliament last month, received the assent of the President on April 18. Immediately thereafter, the government notified somewhat controversial rules to value the services that require quantification of non-monetary consideration for services rendered. The new rules say that if the service provider acts as an undisclosed agent, that is, acting in his own name without disclosing that he is actually acting as an agent of his client, he cannot claim the expenditure incurred by him as a reimbursable expenditure..

Copyright 2006. Gopal Chopra & Associates.